Thoughts from a guy who reached Financial Independence before 30

The Double Whammy

Last time out I talked about life and death. This time I’ll also be talking about life and death. But from a different perspective. Hopefully, it won’t be so morbid!

Today, I want to tell you about what I call the Double Whammy.

The Double Whammy

The Double Whammy is the troubling statistic that we are living longer but less healthy lives. To see this, let’s look at the data:

Over time, life expectancy continues to rise (albeit, at a slower rate). Now sitting at just over 79 years for men, and just under 83 years for women. However, and more concerningly, disability-free life expectancy (the years of life one can expect to live without a disability, chronic illness etc.) is falling. Down to 62.5 years for men and just over 62 years for women.

This leads to an increasing gap. The number of years a person will live with a disability now stands at 19 years for men, 21 years for women.

Implications of the Double Whammy

The Double Whammy has two double whammy implications of its own. The number of years people can save towards retirement and contribute taxes to society is falling. Whilst the number of years people need to live off those savings and the help they need from the state is increasing.

Perhaps most troubling of all is that a person born today will on average become ‘disabled’ at around age 62. They won’t be getting the state pension age until 70 (the increased future SPA). That gap is widening.

It appears commonly accepted however that to keep/make the state pension affordable in the future, further increases may be needed. Whilst it may seem somewhat amusing to expect folks like Major from Fawlty Towers staffing the local Tesco, deep down it feels somewhat insidious.

Blissfulness… I mean optimism

A confounding factor in dealing with this is our eternal optimism (obliviousness) as humans. We continually underestimate how long we will live. We also drastically underestimate our chances of becoming disabled or chronically ill. Much like I overestimate how many chocolate chip cookies I can eat whilst underestimating my propensity to throw up.

Many of us deal with the looming possibility of needing long-term care by doing the very sensible thing of completely ignoring it!

So how can we deal with all this?

Start

For me, the most important bit of personal finance guidance is the simplest: start. Start saving, start investing. If you’re reading this and you ain’t investing, stop. Go and open a broker account (Stocks and Shares ISA) and start investing in index funds.

It’s common wisdom that saving from a young age is sensible. But there’s another reason it’s smart: you can’t bank on saving big sums of money in your peak years if those are suddenly cut short by disability. We know that we underestimate the odds of that happening.

A common refrain against saving early and saving hard is that “life is to be lived”. “There’ll always be a day to make it up”. “You can do the heavy lifting in your peak earning years.”

I understand the arguments against annuities in terms of value for money. But an annuity need not be an ‘all or nothing’ call. Like in the dark days before FREEDOM! From my view, it’s important to see annuities as an insurance, and not an investment, product. You are buying peace of mind. For most people, that can be invaluable. [Don’t worry if you hate annuities/the insurance industry/giving up capital, I’m not advocating forcing people to buy annuities. But I feel they should be part of any serious decumulation planning rather than dismissed out of hand.]

What about Financial Independence?

We also need to deal with the elephant in the room. What does this all mean for the FIRE movement?

On the face of it, I’d say it’s a strong critique of ‘the movement’. We’re likely to live for longer than we think and we’re likely to be less healthy during that time than we think. Ergo, we will underestimate how much we need to save and how expensive life will be. The response to that is: yes! The solution is more difficult. We don’t know, and can never know, what the future holds.

Taking myself as an example, I’m expected to live another 50+ years. There’s no reliable analysis that can tell me whether I’ve got enough money to live on for the rest of my life. Safe Withdrawal Rate analyses only tend to go for a maximum of 40 year retirements. Even then, the data gets well dodge when we start having to rely on pre-80s market data (‘well dodge’ is a well-established technical scientific term by the way). Likewise, I might live another 100 years or I might die tomorrow (hopefully not).

I’ll never know whether ‘enough’ was really ‘enough’.

That’s part of the deal with FIRE though. You lose some ‘closure’ and in exchange get some ‘freedom’. FIRE is definitely not for those looking to have both. I suspect for most people they value more certainty.

Bringing it full circle

In a way this brings us back to the start. When I talk to people about finances I often hear people talk about how long they expect to live. I rarely hear about what life they expect to live. We can see in the data that these two concepts do not follow one another. Alarmingly, they look like they are uncoupling (consciously or not).

Trying to seek closure and certainty in a world of increasing rates of Type 2 Diabetes, Dementia and other chronic illnesses is not possible. Financial planning conversations need to account for the fact that life isn’t binary. It is rare to be healthy then suddenly die (it’s also bloody sad).

But this need not end on a negative note. Because with good financial (and life) planning we can protect ourselves a great deal against life’s misfortunes and get peace of mind. By taking control of our health we can actively live a more healthy life.

In a future post, I’ll have a look at how we can use annuities and other insurance products to create a safety net in retirement.

A word on Disability-Free Life Expectancy (DFLE): this “estimates lifetime free from a limiting persistent illness or disability. This is based upon a self-rated assessment of how health conditions and illnesses limit an individual’s ability to carry out day-to-day activities.” The ONS also produces a second measure of life quality called Healthy Life Expectancy (HLE) which “estimates lifetime spent in “Very good” or “Good” health, is based on how individuals perceive their general health.” These are survey-based estimates, so they show some noise.

If you’re still reading this: 1. Why? 2. You might realise then that I’ve been very naughty in my charts my implying you can compare say 2013-2015 with 2014-2016. Which you shouldn’t as survey respondents from 2014 and 2015 are contained in both datasets. Instead, the best we can do is observe the trend over time. Since an improvement in methodology in 2009-11, the trend has been downwards for DFLE and a stall for HLE. The estimates prior to 2009-11 showed an increase in both DFLE and HLE, though to a lower extent than Life Expectancy. As such, the trend over time has been for a growing length of time for both unhealthy and disabled lifespans. A growing proportion of life is being spent in an ‘unhealthy’ life.

A final word. There are huge variations between countries (i.e. England vs Scotland) and between areas (i.e. London vs North East). The aggregated data hides lots of very interesting stories that you can read in the ONS summary above.

24 thoughts on “The Double Whammy”

This is a really useful post YFG, which touches on something I previously discussed in my long term care cost post.

As a medic I know that we’re getting better at keeping people alive longer. What sort of life that is is a hard question to answer. It’s a dramatic challenge to a persons sense of self to tell them that they may live to 90, but from 85 they’ll have little memory, be doubly incontinent and only able to eat mashed foods. Yet it’s an increasing reality. It’s just too much of an affront on the psyche to imagine yourself in that position, so people deny it, or ignore it. It gets bundled up in a whole host of later life concerns, and people live for the moment.

Tied into the above, people living for the moment indulge. People’s lifestyles aren’t as healthy as they once were (thanks rationing!). That means diseases of lifestyle like diabetes and to an extent cancer, heart, kidney and liver diseases are increasing. Our elderly will grow in number and are getting more unwell in the process. The medical field acknowledges an increase in the number of walking unwell, who manage but only with medical treatments. This costs a lot to the state, and is going to increase in cost, putting the NHS in peril. Again this is being largely ignored and kicked into the long grass as a problem for the future.

I guess I’ll end by saying this is a massive issue which is rarely explored or discussed by or with the general public, so it’s great to give it some airtime. The first generation to reach an average life expectancy of 100 are already out of nappies. Some of my colleagues postulate that the first immortal adults have already been born. What then for safe withdrawal rates?

Thanks FIREShrink. Interesting to hear your views. Your comment had me thinking about something similar my sis who works in the medical profession told me. That people don’t want to hear bad news and she’s not really been trained to give it. She’s learnt over time ways to soften the blow, but how do we go about communicating these hard truths in a way that doesn’t make people run off with fingers in their ears.

On another personal note, I’ve watched a family member in their late years suffer from Type 2 Diabetes. What an awful illness it is. It has really made me think twice about the ol’ “do whatever makes you happy” lifestyle because it can have some horrendous consequences down the line.

We already have one example: Japan. Their demographic inversion started in the late 80s/early 90s, compared to most of Western Europe and the US where the turning point was the late 00s/early 10s. We know what the impact of that was on their economy: falling productivity, deflation, stagnating growth, rising saving rates, a ballooning fiscal deficit, and rising tax dependency ratios. This lead to much lower real rates and lower risk premia. Japanese investors only maintained returns by investing heavily abroad. Of course, if all those target countries suffer “Japanification”, there isn’t going to anywhere to turn. It’s hard for me to see SWRs not dropping substantially over the next 15-20 years as this demographic process evolves, at least until we get through the “boomer” generations retirement. Much easier to see 0% SWR than 4% once you add in the inevitable requirement for much higher taxes, especially on wealth.

Moreover, Japan is, in many ways, a best case given their culturally homegenous nature. They achieved the move to an aging population, stagnation and deflation without too much social unrest. We’re not seeing the same in the West, where instead we are getting a rise in populism/nationalism and friction from substantial intergenerational inequality.

Very good points ZX. These are questions that people much smarter than I are pondering and don’t know the answers. If it’s any consolation, I suspect the UK is in a better position than some other countries with its demographics. China in particular will have a massive impact on global growth as the population boom is followed up by the ‘1 child era’.

A key for global growth will be in how Africa connects economically with the globe (the remaining continent with significant future population growth).

I’ll leave it to the very smart dudes to work it all out. I place great hope in the unrelenting march of human progress.

Life expectancy at birth tends to understate things because it includes the disproportionately high (and tragically sad) number infant mortalities. I suspect the healthy versus life expectancy gap would be even larger when analysed for folks who made it to age 20 or 40.

It would be interesting to know how much of the self-assessed disability survey results reflect an increase in the prevalence of disabilities being diagnosed, as opposed to more people actually suffering them?

For example mental health issues like bipolar and depression, or substance abuse issues like alcoholism, are today sometimes classified as disabilities. In less enlightened times they were viewed as more of a character flaw. The impact of the disability on the individual’s life was the same either way, but the level of support they are entitled to varies considerably as a result. So too would their likelihood of considering themselves to be disabled I suspect.

According to the data the gap reduces in numbers of years as you get older. That said, the proportion of your lifetime with disabilities or unhealthy also increases. By the time a UK man is 40, they’ve ‘lost’ only about 1.5 years of disabled life (15.5 at birth to 12.9 age 40-44) but lost 38.5 years of life expectancy (78.5 at birth to 39.9 age 40-44).

It’s hard to say how impacted self-assessed survery results are. They are adjusted for various factors (according to some big research paper I can’t understand). The data series goes back quite far (to the 80s I think) but the ONS strongly cautions against comparisons pre-2009/11 (and cautions even within the 2009-2016 period). So I think we are right to be cautious about how much we can view from long-term trends. But in conjunction with other indicators (such as changes in chronic illnesses, number of claimaints for long-term disabilities (which are broken out by type)) I think we will be able to get a better idea of whats going on over time.

A disability that comes on at 62 may want you to FIRE early, if you want to do something that needs you to be fit, whether that be exotic travel or an active hobby. Its dangerous to think “I’ll do that when I retire”, when your backpacking dream translates to much more expensive hotels.

It also adjusts the traditional U curve of retirement spending, high at first as you visit your bucket list, dropping fast as you become a homebody, and rising with care costs. The State won’t help you with fun, but its a judgement call as to how much it will cover health costs.

When assessing quality life years, how do you compare the a happy, healthy busy one at 60 and a ill, inactive one at 80. Can the memories of the former offset the tedium of the latter, if you get dementia, can you even view your future self as you who deserves savings. Psychology shows that people discount future pleasure against current reward, as its wise to do if you may drop down dead.

Interestingly there are a few tentative signs that perhaps the “living longer” is stopping. Or maybe it’s just noise on the signal.
The “dying longer” needs to be quantified seriously, rather than our having to pretend to believe self-descriptions and claims for “benefits”.

Anyway, there’s going to have to be allowance made for legalising and simplifying self-euthanasia, including legal protection for people who assist.
Once I’m so demented that I can’t recognise my wife I wish to be killed, painlessly please. If a stroke makes me a drooling parody of a man, ditto.

As I’ve always exercised as an adult, I’ve tended to take my health and fitness for granted. Throughout most of my 20s and 30s, I didn’t eat that well and drank far to much. As I got older, I realised that I needed to start looking after myself, so my diet improved and drinking was cut to weekends only.

Diabetes type 2 runs in my family – two members (grandfather and aunt) died in their mid-60s with diabetic-related complications. There’s a chance I could get it too later in life no matter what I do but I will try to prevent it if I can.

The bad news is that I find that I now get injured more often, injuries take longer to recover and I’m not as flexible as I used to be. Much of my workouts these days include weights and strength-training, since apparently, from the age of 30, everyone starts losing their muscle mass.

I’m confident that I can to a certain extent maintain my fitness by continuing with what I’m doing, but what worries me is that I can’t really do anything for my brain? My paternal grandmother lived the last 7 years of her life thinking she was surrounded by strangers…she was 92 when she finally passed away. Yes, keep it active, continue to learn, don’t let it get lazy and just hope I get lucky!

My plan already includes some guaranteed income (my DB pension and the state pension) but I’m open to annuities at some point, since I won’t always want to (or have the brain capacity) to tinker about with all my different investments.

I enjoyed that piece by Mark Meldon on Monevator and look forward to reading your take on it all.

In ye olden days, unhealthy people died much sooner. Today the Downs syndrome baby will survive to adulthood, that woman who gets breast cancer in their 30s will survive and live a long and fruitful life.

Its unhealthy people that have been the main beneficiaries of increasing life expectancy, it’s reasonable that that will show up in the figures.

I think that’s a fair point Ben. If my understanding is correct, the big surge in life expectancy is due to the massive decline in people not dying young (infant mortality, chronic illnesses like you mentioned, accidents, wars). I think I read somewhere that at the turn of the century, 20pc of people died before they turned 20 (or something similarly horrendous).

Quality of life is surely fundamental to the thinking of most FIREy types. And looking after your health is the keystone of that. There can’t be many bidding for freedom who hope to spend it necking doughnuts and watching TV. I can’t help but think that the national statistics aren’t particularly relevant to the FIRE brigade – except as a call-to-action. I’ve read a few inspiring books with a view to keeping myself out of the NHS as much as possible: Healthy At 100 and The 4 Pillar Plan come to mind. For sure, life is a lottery, and most US blogs advise solving that problem with long-term disability insurance. Have you looked into equivalent products in the UK?

We’re lucky in the UK that we have state disability insurance (although the tabloids have done their best to hammer it). Income protection is also available. If your employer doesn’t offer it, or the level of cover isn’t sufficient, then it can be wise to take out a policy. Unfortunately (in my view), disability benefits are unlikely to be sufficient to cover needs. IP is also something that self employed workers should really have.

Similarly, many employers offer critical illness cover. This pays a lump sum on diagnosis of a number of critical illnesses. Again that’s something the self employed should have if needed (business protection).

Long term care insurance is also available. Though typically only at the point care is needed. It’s bought with a lump sum and pays an income until death used to cover care costs.

Ah! Those rhetorical figures I read about (The Elements of Eloquence). I would say if I had paid attention in English class I’d have the ability to spot these things. Then again, I don’t think they taught that stuff in school. I don’t know. I wasn’t paying attention.